Technology Credit Union Flirts With a Bank Charter

The board of directors of $1.5 billion Technology Credit Union has written the CU's 74,000 members that they may be better served by converting the credit union to a bank.

In a letter posted Oct. 3 on the CU's website, the board of the San Jose, Calif.-based credit union laid out its reasons for considering the option and invited member comments before making a final decision at a meeting slated for Nov. 2. Under current NCUA regulations, the letter and the invitation for member comment are considered the first step in the agency's charter change process.

“Tech CU's board of directors believes that, as a mutual savings bank, Tech CU will be able to significantly expand its commercial lending business,” the credit union board wrote in the letter. “While we will continue to be primarily a residential and consumer lender, we will seek to diversify our loan portfolio by increasing secured commercial and industrial lending to small and mid-size businesses in our market area.

"Tech CU's board of directors believes that this should improve our earnings since commercial loans generally carry higher interest rates and origination fees than typical residential mortgage and consumer loans. The additional revenues that Tech CU's board of directors believes will be generated by this type of lending would be used to support and enhance our existing products and services and provide our current and future members with the valued financial products and services and cutting-edge technology they want and expect.”

The CU's board also cited expanded capital opportunities as a reason for considering charter change, as well as the ability to serve the broader community without field of membership restrictions.

As per the NCUA's regulations, the CU also invited member comment on the possible change, and the board indicated it will consider adopting the charter change proposal on Nov. 2.

“Tech CU will be able to achieve the growth needed to remain competitive, continue to enhance and expand our current product and service offerings such as business banking and commercial lending programs and justify adding branch locations,” Barbara Kamm, CEO of Technology Credit Union, was quoted by The San Francisco Business Times in an Oct. 3 article. The CU had not returned calls for comment from Credit Union Times as of press time.

Reaction to the announcement has been swift and, compared to previous charter changes and charter change attempts, more vigorous.

The California Credit Union League and CUNA CEO Bill Cheney both expressed concern that Technology CU members be completely informed about the effects of a move to a mutual bank charter.

“Charter conversions should be approached from the viewpoint of the members-owners of the credit union,” stated league CEO Diana Dykstra. “While a credit union’s management may experience the operational advantages of a bank charter, the benefit does not necessarily extend to the credit union’s members. In the end, those members could be left with a financial institution that no longer strives to put their interests first.”

The league pointed to the difference in governance between a credit union and stock-issuing bank but did not mention that the Technology CU board is considering a switch to a mutual institution, which would have similar, though not identical, governance rules.

The association also pointed out that research shows CUs typically offer better rates on loans than do banks and that consumers save money by using a credit union instead of a bank. “In California, that savings amounts to about $930 million, or $183 per member household,” the league said.

Cheney expressed similar skepticism that a bank charter would serve Technology members better than a CU charter.

“We continue to believe that the credit union charter remains the best option for serving the interests of consumers,” Cheney said. “That point was made acutely over the last several days when Bank of America announced a monthly debit card fee–which was followed by a resounding and sharp outcry from across the nation by consumers and the news media alike that credit union membership is the natural haven from such high fees, typically charged by banks.”

He also pointed out that, in terms of deposit insurance premiums, changing charters might lead Technology from a less expensive option in the NCUSIF to a more expensive one with the FDIC.

“All credit unions should recognize that estimates of their shares of the costs of the corporate credit union resolution have been dropping,” Cheney observed. “As result of recent announcements by the NCUA–which are likely to affect credit unions over the next several years–credit unions will likely pay less in the combined costs of NCUSIF premiums and corporate resolution than similarly sized banks will pay in their premiums to the FDIC over the coming decade,” he suggested.

If the $1.5 billion Technology Credit Union decides to move forward in its effort to convert to a mutual bank, it is new ground for the California Department of Financial Institutions.

A spokesman for the California DFI confirmed that the state has never had a credit union to bank charter change attempt before and that the state's credit union regulations are silent on the topic.

California's financial code explicitly provides for state-chartered credit unions to convert to federally chartered institutions and how to do that. Likewise, it provides for federally chartered CUs to adopt the state charter. But it is silent on state-chartered credit unions conversion to mutual banks.

Technology CU, in its letter to members introducing the idea, listed a desire to make more commercial loans as a reason for the conversion. Credit unions are under a legislatively mandated cap of 12.25% of assets on member business loans. According to the most recent report to NCUA, the CU has booked 144 member business loans worth just over $81.3 million, representing more than 5% of the credit union's assets. To reach the cap at their current asset level, the credit union would have book more than $184 million in member business loans.

According to CU Financial Services, a Portland, Maine, consultancy that helps credit unions change to bank charters, if Technology Credit Union succeeds in moving to a bank, it will become the 37th credit union to change charters since 1995.